Part 2: Matters for Auckland Council to consider

Final audits of Auckland's dissolved councils, and managing leaky home liabilities.

The significance of the former councils' annual reports

2.1
The last step in accounting for the performance of the former councils, before dissolution on 31 October 2010, was finalising their annual reports and summaries. This reported performance forms part of the former councils' legacy.

Establishing Auckland Council's opening position

2.2
The annual reports of the dissolved councils and terminated council-controlled organisations provide a starting point for Auckland Council. Now that they have been completed, the Council needs to quickly establish its opening position.

2.3
It is important that the Council moves quickly to establish its opening position, because this position determines:

  • the reliability of its internal management monitoring and reporting arrangements;
  • the starting point for projections – the Council's planning document and its draft 2011/12 annual plan4 reflect estimated opening positions that will be superseded; and
  • the reported performance and position for the Council in its first annual report for the eight months to 30 June 2011.

2.4
Auckland Council's opening financial position differs from the aggregate closing position of the former councils because:

  • the Auckland reform legislation provides for substantial assets and liabilities included in the former councils to be taken up by council-controlled entities, rather than by the Council; and
  • the former councils reported their results and net asset positions using different accounting policies, but the Council must apply a single set of consistent accounting policies in recording its opening position, and in reporting its transactions and results.

Management of transitional policies and systems

2.5
The former councils operated their own financial and non-financial reporting systems until dissolution. These systems were used in preparing the annual reports.

2.6
Auckland Council began to operate new systems and procedures on 1 November 2010, but has retained some systems of the former councils. For example, many of the former councils' rating systems have been kept as the Council moves towards a single rating system.

2.7
The Council's reporting of financial and non-financial information will initially be based on former councils' funding policies and transitional systems. The Council will need to carefully manage the integration of its various policies and systems.

Aspects of the 2009/10 service performance results

2.8
All eight former councils achieved most of their service performance targets. The former councils provided different services to their communities and reported their service performance in the context of their respective activities and performance frameworks. These differed, although they did have some common features.

2.9
The framework for reporting service performance will increasingly need to reflect the unique aspects of the Council's structure.

2.10
The Council has begun to combine the activities and frameworks of the former councils into an effective activity structure. This emerging structure is reflected in Auckland Council's Long-term Plan, 1 November 2010 – 30 June 2019,5 and in the Council's Draft Annual Plan 2011/12, which was open for consultation at the time this report was being prepared. The Council will report its service performance against this combined structure in its annual reports in future.

2.11
The Council will continue to develop the framework within which it is accountable for, and reports, service performance. In preparing its long-term plan for 2012-22, the Council will need to consider the following:

  • sharing new strategies and decisions between the governing body and local boards;
  • refining levels of service, including identifying them across the region and in local board areas; and
  • effectively combining the various disclosure requirements associated with the delivery of significant services by entities the Council controls.

2.12
The Council must take into account the new requirements introduced by the Local Government Amendment Act 2010, including mandatory disclosures for certain groups of activities.6 Standard performance measures, to be specified in regulations that apply beyond 2012, are to be used for reporting service performance for these groups of activities.

2.13
Some of these mandated groups of activities are provided through organisations the Council controls.7 Where this is the case, the required standard performance measures must be included in those organisations' statements of intent and reported against annually.

2.14
These changes will significantly affect disclosures relating to some activities to be carried out by Auckland Transport and Watercare Services Limited; namely, water supply, sewage treatment and disposal, and road and footpath activities.

2.15
In reporting performance, the Council will also need to consider how best to present financial information, which does not have to be consolidated (that is, excludes council-controlled organisations) for planning purposes8 but must be consolidated (to include council-controlled organisations) in annual reports.

Regulatory performance focused at governing body level

2.16
Auckland Council has combined all the regulatory functions of the former councils and includes these in its planning and regulation group of activities. The reform legislation makes the regulatory functions of the Council a matter for the governing body. These functions should be dealt with consistently across Auckland.

2.17
The seven former territorial local authorities had a range of measures and targets. All had measures and targets for processing building consents. For example, targets for compliance with deadlines ranged from 90% to 100%, and the former councils reported compliance between 77% and 100%.

2.18
All seven former territorial local authorities also had measures and targets for resource consent processing. Targets for complying with deadlines ranged from 70% to 100%, and the former councils reported compliance between 51% and 100%.

2.19
The Council plans to improve the performance of processing building consents. Its planning document9 for 2010/11 and its draft 2011/12 annual plan10 show a target of 100% compliance with deadlines.

Library performance: Decision-making and service at local board level

2.20
The former councils reported library services' performance using different measures and targets. Six of the former councils had targets for satisfaction with the library services that ranged from 74% to 94%. Their reported performance was between 70% and 93%.

2.21
Auckland Council has assigned library services to its community group of activities. The planning document sets out a consistent performance framework for library services that the Council provides, including performance measures and targets. These targets include user satisfaction targets, such as one of 85% for overall satisfaction with the services provided.

2.22
Decision-making for many aspects of library services has been initially allocated to local boards.11 The draft 2011/12 annual plan disaggregates the levels of service and associated performance measures and targets for the Council's library services, and shows them at the local board level. It does so by including them, along with other activities where decision-making rests with local boards, in the first 21 draft local board agreements.

2.23
We noted in our December 2010 report, Matters arising from Auckland Council's planning document, that combining the activities and performance frameworks of the former councils means that levels of service are expressed as an average across Auckland. In practice, services are delivered at different levels in different parts of the region. The Council has not yet been able to identify meaningful levels of service for some activities within individual local board areas.

2.24
The 21 draft local board agreements included in the draft 2011/12 annual plan show the basis on which levels of service brought forward from the former councils, together with associated performance measures and targets, have been identified at the local board level.12

Reporting service performance in entities controlled by Auckland Council

2.25
The former councils used a range of measures and targets to report service performance by their subsidiaries.13

2.26
Particularly significant are the Council's activities relating to transport and water. The former councils' transport and water activities were delivered by a combination of:

  • direct provision, such as:
    • Auckland Regional Council's transport activities, and the roading activities of the other former councils; and
    • former territorial authorities' provision of retail water and wastewater services; and
  • provision through other entities, such as:
    • transport provision by the Auckland Regional Transport Authority;
    • retail water provision by entities controlled by the former councils; and
    • wholesale water provision through Watercare Services Limited.

2.27
The Council has combined the substantial transport and water activities of the former councils into substantial new groups of activities, delivered by Auckland Transport and Watercare Services Limited, respectively. The operations of the former Auckland Regional Transport Authority are also delivered by Auckland Transport. Watercare Services Limited will continue to deliver bulk water supply and other operations.

2.28
The framework for reporting 2010/11 service performance for the Council's groups of activities relating to transport and water (supply and wastewater)14 is reflected in the long-term plan.15 Further information about this framework, including performance measures and targets, is included in the disclosure about council-controlled entities.16

2.29
The framework for reporting service performance for transport and water has been developed further in the draft 2011/12 annual plan,17 which the Council will report against in 2011/12.

Aspects of the financial results for 2009/10

Former councils' annual reports and plans

2.30
The former councils prepared annual plans for the year ended 30 June 2010 before the reform legislation was fully enacted. These were incorporated as the first year within the 2009-19 long-term plans of the respective councils. The reform legislation required annual plans to be prepared by the former councils for their final four-month period up to 31 October 2010. For the 16-month period to 31 October 2010, each former council reported against the budgets included in these two annual plans.

2.31
Appendices 3 and 4 show the final reported net asset positions of the former councils on 31 October 2010 and their final comprehensive income for the 16-month period ending on that date. They also compare these in aggregate18 with the relevant budgets.

2.32
The former councils had overall net assets of $25.4 billion as at 31 October 2010. This was $0.2 billion lower than anticipated in their budgets.

  • Liabilities were $1.3 billion higher than budgeted – reflecting nearly $1 billion of new borrowing, mainly by Auckland City Council and Manukau City Council, and significant new provisions for dealing with leaky home claims.
  • Assets were $1.1 billion more than budgeted. Current assets, including the unspent portion of Manukau City Council's new borrowing, accounted for $0.4 billion of this difference. Non-current assets were $0.5 billion more, a sum that would have been greater if revaluations of tangible assets had been as high as anticipated by the former councils' budgets. Auckland City Council's new borrowing, lent to other councils as part of a co-ordinated approach taken to treasury operations, increased the investment component of its non-current assets.

2.33
The former councils' total comprehensive income for the 16 months to 31 October 2010 was $0.7 billion less than had been anticipated. The main factors contributing to the shortfall were:

  • lower-than-expected revaluations of fixed assets ($0.3 billion lower than expected);19 and
  • expenditure that was $0.4 billion more than expected, mainly because of additional provisions required for leaky home liabilities ($0.2 billion more than the previous year) and unbudgeted spending arising from the reform ($0.1 billion relating to redundancies and asset write-downs).

Adjustments arising from dissolution or termination

2.34
The annual reports of the former councils and council-controlled entities disclose the effects of the reform. These disclosures include details of adjustments and transactions reflected in the annual reports that arose from the reform, which relate to redundancies and asset write-downs totalling $69 million. Of this, $50 million relates to the former councils and was not budgeted for. Figure 1 provides a summary of the totals, and Appendix 1 sets out more detailed information.

Figure 1
Significant financial effects of dissolution


 Redundancies
$000		 Asset write-downs
$000
Local authorities 27,228 23,063
Council-controlled organisations 3,433 14,853
Totals 30,661 37,916

2.35
Payments to former chief executives of the dissolved councils are included in the redundancy numbers shown in Figure 1. We reported separately on issues arising from the payments to chief executives in our November 2010 report, Inquiry into payments to chief executives of dissolving local authorities in Auckland.20

Provisions for dealing with leaky home claims

2.36
The former councils' financial statements included significant additional provisions for dealing with leaky home claims. These provisions increased by $245 million (from $221 million to $469 million). The higher provisions were generally not anticipated in the former councils' budgeting. There was better estimating of, and provision for, total potential liabilities, in preparation for the transition to Auckland Council. Appendix 5 sets out provisions made by the former councils as at 31 October 2010, compared with provisions made as at 30 June 2009.

2.37
Part 3 explains the issues relating to leaky home liabilities for a sample of local authorities. The new Auckland Council is the local authority most affected by the leaky home liability issue, and has the largest disclosed total potential liability for addressing it.

Assets identified as transferring to receiving entities

2.38
The annual reports of the former councils show significant activities being conducted through subsidiaries. Appendices 3 and 4 show, by deduction, that subsidiaries held $2.7 billion of assets on 31 October 2010, and spent $0.8 billion in the 16 months ending on that date.21

2.39
The annual reports of the former entities include disclosures about the reform and its effect. These disclosures identify the entities that would receive their operations following dissolution, and the book values of the assets and liabilities they would receive, as at 31 October 2010.

2.40
Auckland Council received the former councils' operations unless the reform legislation specified another receiving entity. Some operations and related assets were transferred to Waikato local authorities.22

2.41
The Act specifies that substantial operations and related assets be transferred to the subsidiaries within the Council's new group structure. Appendix 6 shows that a total of $18.9 billion of the former councils' assets, together with associated liabilities, were to be received by five Council subsidiaries: Auckland Transport, Watercare Services Limited, Auckland Council Investments Limited, Regional Facilities Auckland Limited, and Auckland Waterfront Development Agency Limited. Of this, $16.4 billion relates to assets that transfer to Auckland Transport and Watercare Services Limited.

2.42
The $18.9 billion of assets and associated borrowings transferred to the five subsidiaries are not included in the Council's opening balance sheet. However, these transfers have not depleted the Council's overall net asset position because the value of the transfers has increased the opening value of the Council's investments in subsidiaries by an equivalent amount.

2.43
As well as the assets noted above, the receiving entities gained operations and related assets from the termination of council-controlled entities. For example:

  • Auckland Transport received the entire operations and assets of Auckland Regional Transport Authority;23 and
  • Watercare Services Limited received the entire operations and assets of Metro Water Limited24 and Manukau Water Limited.25

4: Auckland Council (2011), Draft Annual Plan 2011/12, available at www.aucklandcouncil.govt.nz, was open for consultation at the time this report was being prepared.

5: Auckland Transition Agency (2010), Auckland Council's Long-term Plan, 1 November 2010 – 30 June 2019, Volume 1: Summary and context, page 1, available at www.aucklandcouncil.govt.nz.

6: Activities for which separate disclosures are required are water supply, sewerage and the treatment and disposal of sewage, stormwater drainage, flood protection and control works, and the provision of roads and footpaths.

7: Including Watercare Services Limited, which was jointly owned by the former councils, and becomes a council-controlled organisation in 2012.

8: In the long-term and annual plans.

9: Auckland Transition Agency (2010), Auckland Council's Long-term Plan, 1 November 2010 – 30 June 2019, Volume 2: Visions, strategies and activities, page 78.

10: Auckland Council (2011), Draft Annual Plan 2011/12, page 105.

11: Auckland Council's Long-term Plan, 1 November 2010 – 30 June 2019, Volume 3: Local boards, page 103.

12: For example, see information and draft agreement for Waitemata Local Board in Auckland Council's Draft Annual Plan 2011/12, page 13. Levels of service are derived for individual local boards using actual local board data. Where local board data is not available, data relating to the relevant former council area is used. If neither of those two sources is available, regional data can be used.

13: Including Watercare Services Limited, which was jointly owned by the former councils, and becomes a council-controlled organisation in 2012.

14: Stormwater activities are retained by Auckland Council.

15 Auckland Transition Agency (2010), Auckland Council's Long-term Plan, 1 November 2010 – 30 June 2019, Volume 2: Vision, strategies and activities, pages 121-130, and pages 140-149.

16 Auckland Council's Long-term Plan, 1 November 2010 – 30 June 2019, Volume 4: Council-controlled organisations, pages 7-25.

17 Auckland Council (2011), Draft Annual Plan 2011/12, activity information on pages 159-169, and pages 143-152; council-controlled organisations information on pages 210-214 and pages 233-236.

18: Appendices 3 and 4 show the non-consolidated final reported net asset positions and final comprehensive income. The numbers are aggregated without eliminating balances that are common across the former councils.

19 Figures rounded. See Appendix 4.

20 See www.oag.govt.nz/2010/auckland-ceos-payments.

21: The results for Watercare Services Limited were not consolidated into the results of the individual former councils because none of the former councils held a controlling share in that company's equity.

22: Waikato District Council, Hauraki District Council, and Environment Waikato.

23: Auckland Regional Transport Authority's total assets as at 31 October 2010 were $0.4 billion.

24: Metro Water Limited's total assets as at 31 October 2010 were $1.4 billion.

25: Manukau Water Limited's total assets as at 31 October 2010 were $1.1 billion.

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